Legg Mason puts 'sell' on Hollis-Eden

MichaelBaron

NEW YORK (CBS.MW) - Shares of Hollis-Eden Pharmaceuticals tanked Wednesday after Legg Mason initiated coverage of the company with a "sell" rating.

The firm, which also set a 12-month price target of $10, cited its belief that the company's story relies too heavily on a single event - eventually securing a contract with the U.S. government for its lead product candidate, the Neumune radiation treatment.

The stock
HEPH
dropped $4.79, or 20 percent, to close at $19.45, on volume of 3.6 million. The shares have now given back roughly 40 percent of a 52-week high of $36.25 set on Sept. 23.

Richard Hollis, chairman, president and CEO of the San Diego-based firm, responded to Legg Mason's contention in an interview with CBS MarketWatch, calling the note "borderline irresponsible" and saying it misstates the facts in certain places.

Legg Mason's note is very frank about its opinion of Hollis-Eden. The company is developing Neumune in collaboration with the government, and the firm simply doesn't believe the status of product justifies the stock's current valuation.

"While a therapeutic to treat full body radiation is important for the U.S. government to have in its armament, in our opinion, we believe it is not a significant enough proposition on which to build a business model," analysts Edward Nash and Robert Gilliam told clients in a research note accompanying the initiation.

The firm was also less than enthusiastic about the rest of the pipeline, saying the remaining candidates are "extremely early stage," and that it doesn't believe Hollis-Eden will realize any revenue from them in the near future.

The $10 price target is based on a multiple of three times the company's estimated sales of $100 million for 2005 plus consideration of its estimated net cash at the end of 2003.

Hollis took issue with what he termed "insinuation and innuendo" in the note's tone, and its presentation of information. Specifically, he said, based on numerous personal conversations, he knows the government has a "very profound" interest in Neumune. He added that the idea that the company's business model is unsound because it has made Neumune a top priority is preposterous.

"There has been a need for an anti-radiation drug since the Cold War, and the Defense Department has said this (Neumune) is the most promising candidate yet," he said. "In today's society, with the possibility of a dirty bomb, this need is as pressing as ever."

Neumune is being developed under a government provision that allows for approval of a drug that demonstrates safety in humans and efficacy in relevant animal studies when actual testing on humans would be unethical. Neumune can also be stockpiled if the government makes an emergency determination of its need.

The company is currently targeting filing a new drug application for Neumune "sometime in 2004" and the timeline for its development is intact with previous indications.

Hollis directly addressed Legg Mason's comment that successful development of Neumune doesn't guarantee demand, and that the government's current Project BioShield proposal doesn't set aside any funds for radiation protection therapeutics.

In its research note, the firm said: "We believe, given the need for such a therapy, many investors are incorrectly assuming that the government will pay for such a drug. To-date, despite the fact that the government has stated that a need exists for protection from exposure to radiation, the government has stated that its first priority is protection against smallpox, anthrax, and other biologics."

Hollis said this is a misstatement of the facts, and that part of the funding allocated to Project BioShield would go to radiation protection products upon its approval.

Legg Mason's bearish view is also, at least in part, based upon an opinion that other early-stage biotechnology companies have a more attractive risk-reward profile.

Hollis responded to this by saying the firm obviously doesn't understand his company's science. He explained that, by focusing on developing hormones and their role in the body's regulatory system, the company is taking a broad view where its compounds could potentially influence the body's immune system and control the progression of a number of different diseases.

"There is the insinuation that we're taking an unsound all-or-nothing approach with Neumune, and that's just not the case," he said. "We've got one of the best business models out there."

As for the company's pipeline, Hollis said a trial for its Reversionex cholesterol-lowering hormone has been completed, and data will be released shortly, and that results of a phase II trial on the use of Reversionex to reverse deterioration of the immune system in the elderly should be available in the first quarter.

Pointing to a cash stash of $88 million, Hollis demanded Legg Mason name some small biotechs with better prospects, saying "I'd like to know what companies he's talking about."

Interestingly, Hollis-Eden completed a public offering of 2.5 million shares of its common stock at $25 each this morning, selling the shares to institutional investors who Hollis said did "thorough" due diligence.

To hear further comments from Richard Hollis, check out an interview conducted with CBS MarketWatch last week. Watch interview here

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